Sample Questions and Answers
What is the tax treatment of employee stock options for a business?
They are immediately taxed as ordinary income.
B. They are taxed when exercised or sold, depending on the type of stock option.
C. They are not taxable until the employee sells the stock.
D. They are never taxable to employees.
Answer: B
When can a business claim the research and development (R&D) tax credit?
After the business has been operational for five years
B. When the business conducts qualified R&D activities and incurs related expenses
C. Only if the business is a publicly traded company
D. When the business has no taxable income
Answer: B
How are rental income and expenses treated for tax purposes in a business?
Rental income is not subject to taxes, and related expenses are not deductible.
B. Rental income is taxable, and rental expenses can be deducted from taxable income.
C. Rental income is subject to capital gains tax, and expenses are not deductible.
D. Rental income and expenses are only taxable if the rental property is sold.
Answer: B
What is a key tax difference between a partnership and a corporation?
Partnerships are taxed on their income, while corporations are not.
B. Partnerships do not file tax returns, but corporations must file annually.
C. Partnerships are pass-through entities, while corporations are taxed separately from owners.
D. Partnerships are taxed at lower rates than corporations.
Answer: C
What is the general tax treatment of a business’s income from the sale of inventory?
Income from the sale of inventory is taxed at a capital gains rate.
B. Income is treated as ordinary income, and the business must pay taxes accordingly.
C. The income is exempt from tax if the business holds the inventory for more than a year.
D. The income is tax-free if it is used to reinvest in the business.
Answer: B
What is the tax benefit of accelerated depreciation methods for a business?
The business can increase its depreciation deductions in the early years, reducing taxable income.
B. Accelerated depreciation is not allowed for tax purposes.
C. Accelerated depreciation reduces the tax rate applied to the business’s income.
D. The business can avoid paying taxes on the depreciation.
Answer: A
Which of the following is a tax benefit of operating a business as a limited liability company (LLC)?
LLCs avoid paying income taxes altogether.
B. LLC owners can avoid self-employment taxes.
C. LLCs are subject to double taxation on income.
D. LLCs offer flexibility in how they are taxed (e.g., as a partnership or corporation).
Answer: D
What is the primary tax advantage of contributing to a qualified retirement plan?
Contributions are exempt from payroll taxes.
B. Contributions reduce taxable income in the year they are made.
C. Contributions are tax-free when withdrawn.
D. Contributions do not need to be reported to the IRS.
Answer: B
How are business losses handled for tax purposes when a business operates as a corporation?
Losses can only be carried forward to offset future income.
B. Losses are passed through to shareholders and deducted on their individual tax returns.
C. Losses reduce the corporation’s taxable income in the current year.
D. Losses must be written off and cannot be used to offset future income.
Answer: A
What tax benefit does a business receive from deducting employee retirement plan contributions?
The business reduces its taxable income, which in turn reduces the taxes owed.
B. The business receives a tax credit for retirement contributions.
C. The business avoids paying self-employment taxes.
D. Contributions are not deductible for tax purposes.
Answer: A
Which of the following describes a tax credit?
A reduction in the amount of income that is taxable.
B. A direct reduction in the amount of taxes owed.
C. A deduction that lowers the taxable income of a business.
D. A reduction in the tax rate applied to taxable income.
Answer: B
How does a business benefit from a net operating loss (NOL)?
The NOL can be carried forward to offset future taxable income.
B. The NOL automatically results in a tax refund.
C. The NOL can be deducted in the year it occurs, reducing taxes owed.
D. The NOL increases taxable income in future years.
Answer: A
What is the tax treatment of a business’s loan interest payments?
Interest payments are not deductible for tax purposes.
B. Interest payments are deductible as a business expense.
C. Interest payments are deducted only if the loan is used to purchase property.
D. Interest payments are taxed as income for the business.
Answer: B
What type of tax does a business generally pay on its earnings?
Self-employment tax
B. Corporate income tax
C. Sales tax
D. Excise tax
Answer: B
Which of the following is NOT a tax strategy for a business?
Deferring income recognition to the following year
B. Accelerating deductible expenses into the current year
C. Expensing large capital purchases
D. Using tax credits to reduce taxes owed
Answer: C
What is the tax treatment of a business’s charitable contribution?
Charitable contributions are always tax-free for the business.
B. Contributions are deducted from taxable income, reducing the business’s tax liability.
C. Contributions are taxed as income to the business.
D. Charitable contributions can only be made by corporations, not LLCs.
Answer: B
What is the primary tax benefit of using a cash method of accounting for a business?
Businesses can defer taxes until income is received or expenses are paid.
B. Businesses can accelerate deductions by recognizing income when earned.
C. The business will pay fewer taxes overall.
D. Businesses are required to use the accrual method of accounting instead.
Answer: A
Which of the following is NOT a tax-deductible business expense?
Interest on business loans
B. Salaries paid to employees
C. Personal groceries
D. Depreciation of business equipment
Answer: C
How are interest expenses on a business loan generally treated for tax purposes?
They are fully deductible as a business expense.
B. They are not deductible unless the loan is secured by property.
C. They are subject to special tax treatment depending on the type of loan.
D. Interest expenses are taxed as capital gains.
Answer: A
A business that qualifies for tax-exempt status must file which form with the IRS?
Form 1120
B. Form 1040
C. Form 990
D. Form 1065
Answer: C
What is the maximum amount a business can deduct for a Section 179 deduction in the tax year 2024?
$1,000,000
B. $500,000
C. $25,000
D. $10,000
Answer: A
Which of the following types of income is generally subject to self-employment taxes for a business owner?
Dividend income
B. Rental income from personal property
C. Income from a business operated by the owner
D. Interest income
Answer: C
What is the tax effect when a business owner sells a capital asset at a gain?
The gain is taxed as ordinary income.
B. The gain is taxed at long-term capital gains rates, if applicable.
C. The gain is not taxable if the asset is sold to a family member.
D. The gain is not taxable if the asset was held for less than a year.
Answer: B
How are payments made to independent contractors generally taxed for a business?
Payments to independent contractors are subject to payroll taxes.
B. Payments to independent contractors are tax-free.
C. Payments are reported on Form 1099 and the contractor is responsible for self-employment taxes.
D. Payments to independent contractors are taxed as ordinary income to the business.
Answer: C
Which of the following businesses is generally eligible to file as an S Corporation?
Sole proprietorships
B. C Corporations
C. Partnerships with more than 100 partners
D. Businesses that have foreign shareholders
Answer: B
A business that sells property for a loss can generally treat the loss as:
An ordinary loss deductible in the current tax year.
B. A capital loss that can only offset capital gains.
C. A loss that is not deductible for tax purposes.
D. A loss that can be carried forward to offset future gains.
Answer: A
Which of the following best describes the tax treatment of a business’s research and development (R&D) expenses?
R&D expenses are capitalized and deducted over several years.
B. R&D expenses are not deductible.
C. R&D expenses are fully deductible in the year incurred.
D. R&D expenses must be amortized over five years.
Answer: C
What is the tax treatment for business-related travel expenses?
Travel expenses are deductible only if the trip is for more than 10 days.
B. Travel expenses are fully deductible for business-related travel.
C. Travel expenses are only deductible if they are paid for by the business, not the employee.
D. Travel expenses must be reported as income.
Answer: B
What is the tax treatment of a loss from the sale of business property?
Losses from the sale of business property are generally deductible.
B. Losses from the sale of business property are not deductible.
C. The loss is considered a capital loss and can only offset capital gains.
D. The loss is carried forward and only deductible in future years.
Answer: A
Which of the following statements is true about business tax credits?
Business tax credits reduce taxable income.
B. Business tax credits reduce the amount of taxes owed, dollar for dollar.
C. Business tax credits increase the amount of taxable income.
D. Business tax credits are only available to corporations.
Answer: B
How does a business qualify for a tax deduction for a charitable contribution?
The contribution must be made to a qualified 501(c)(3) organization.
B. The contribution must be made in cash only.
C. The contribution must exceed $5,000.
D. The business must provide the IRS with a receipt for the contribution.
Answer: A
Which of the following describes a “tax deferral” for a business?
A business cannot defer taxes.
B. A tax deferral allows a business to delay the payment of taxes until a future year.
C. A tax deferral results in a permanent reduction in taxes owed.
D. Tax deferrals are only available for small businesses.
Answer: B
Which of the following would qualify as a tax deduction for a business?
A home mortgage interest payment on a personal residence.
B. Business-related entertainment expenses that are not directly related to a business meeting.
C. Business insurance premiums.
D. Personal gifts to family members.
Answer: C
How is business income generally reported for an S Corporation?
The S Corporation pays taxes on the income.
B. The income is reported on individual tax returns of the shareholders.
C. The income is not taxed at all.
D. The income is subject to self-employment taxes.
Answer: B
A business is generally required to file its taxes by:
April 15th of each year.
B. The 15th day of the 4th month after the end of its tax year.
C. December 31st of each year.
D. The 15th day of the 3rd month following the end of its tax year.
Answer: B
Which of the following is a key characteristic of a Limited Liability Company (LLC)?
LLCs must pay corporate income taxes.
B. LLCs provide the same level of liability protection as a corporation.
C. LLCs are required to have a board of directors.
D. LLCs can only be owned by corporations.
Answer: B
How is a tax credit different from a tax deduction for a business?
A tax credit reduces taxable income, while a deduction reduces taxes owed.
B. A tax credit reduces taxes owed directly, while a deduction reduces taxable income.
C. A tax credit is refundable, while a deduction is not.
D. A tax credit increases taxable income.
Answer: B
Which of the following business expenses are generally deductible?
Business-related travel and meals
B. Fines for violating tax laws
C. Salaries paid to owners and their families
D. Non-business personal expenses
Answer: A
How does a business qualify for the research and development (R&D) tax credit?
The business must be located in a low-income area.
B. The business must have received approval from the IRS before beginning R&D activities.
C. The business must incur qualifying R&D expenses related to developing new products or processes.
D. The business must be a multinational corporation.
Answer: C
When is a business required to pay estimated taxes?
Only if it expects to owe more than $1,000 in taxes for the year.
B. Only if it is a corporation.
C. Only if it has employees.
D. A business is never required to pay estimated taxes.
Answer: A
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